A divergence in investor behaviour is pointing towards a recovery for equities in Q1 2019, according to research by Fidante Partners, with sentiment and fund flow data indicating the asset class is no longer in 'despondency' territory.
In its quarterly Hype Cycle report, which analyses investment hype in financial markets via Google searches, ETF flows and the premium over the net asset value of relevant investment trusts, the firm said the basis for its equity recovery prediction was rooted in investor behavioural patterns.
It said that although retail investors were being "excessively pessimistic" about equity markets, institutional investors had been putting money to work to benefit from recent lower prices. Historically, trends like this indicate a boost to stockmarkets in the coming quarter.
In its previous report, the Q4 Hype Cycle said equities were in 'despondency' territory due to a combination of negative price momentum and pessimistic investor sentiment. However, this has since been upgraded to 'overhyped'.
Joachim Klement, head of investment research at Fidante Partners, said: "Equity markets as well as other risk assets have corrected in the fourth quarter of 2018 and the question on everyone's mind is: 'Is it too soon to buy or should we even sell into this decline?'
"Our research analyses the sentiment and fund flow data in global equities, and [as a result] past evidence points towards these situations as indicative of a recovery in the next three months."
This was in contrast to most other asset classes, which were categorised as in 'despondency' this quarter following the strong correction at the end of 2018.
The only other asset class to escape the 'despondency' label was gold, which was classed as being in a 'boom' due to increased investor demand and a recovery in the fourth quarter.
The report noted: "This widespread despondency indicates it might to be too soon to buy into risk assets. However, there are two asset classes that are not in the despondency quadrant that allow a deeper investigation.
"Global equities, as well as high dividend stocks, are currently characterised by negative price momentum but positive investor hype.
"Could it be this combination, which normally characterises an overhyped market, might indicate the green shoots of a recovery?"
The report also puts together a specific Equity Hype index and said this was registered as negative or neutral. When combined with an excessively pessimistic retail sentiment, this was a strong indicator of high equity market returns.
"When the Equity Hype index is close to zero, while retail sentiment is very pessimistic, this indicates a situation where retail investors are scared for no reason. In this environment, it is typically better to remain invested and wait for a recovery in stockmarkets," it said.